4 things GoPro needs to do to succeed

Analysis: Successful digital marketplaces have these things in common

By

AsheeshAdvani

Surfline/GoPro

A surfer records his experience in the middle of a wave with his GoPro camera.

Extreme-sports enthusiasts use GoPro video cameras to film stunts such as surfing massive waves or jumping out of airplanes. In some ways, the camera maker’s initial public offering is giving many investors a similar jolt.

After all, the valuation is high and the risks are palpable. The $24 per share pricing values GoPro
GPRO, -5.02%
at about $3 billion, with a higher price-to-earnings ratio than Apple
AAPL, +1.84%
The stock opened at $28.65 in its debut today and closed at $31.34.

Clearly this valuation is not purely based on the business prospects of selling its durable cameras, as most consumer-electronics products become commoditized fairly quickly. The real investor appetite for GoPro is based on the potential to monetize the sharing of all the mind-bending videos filmed by its customers. (Still, the financial numbers look good: Profit last year soared 88% to $61 million, and revenue rose at about the same pace, to $986 million.)

It’s a familiar story to all of us now: The hot IPO with a high valuation based on the growth prospects enabled by a digital-sharing economy.

But how does an investor know when this kind of digital marketplace will gain traction? When even Twitter
TWTR, -1.61%
has had trouble monetizing all of the celebrities and business leaders who use its service to exchange ideas?

In the same way we learned more than a decade ago that being a dot-com was not in itself a guarantee of success, today we’re learning that not all Internet marketplaces gain traction. Why do some marketplaces such as Zillow
Z, -0.99%
Airbnb and Uber disrupt their industries, while others such as Fab – a design marketplace that was valued at $1 billion only a year ago – stumble?

If there were a foolproof formula, all marketplace opportunities would already be occupied and the world would be a much more efficient place. As I’m in the marketplace-building business, I’ve deconstructed dozens of marketplaces — successful and not — to analyze what conditions need to be present for lasting success.

Here’s my list of four of the main drivers of an online marketplace opportunity, as well as the seeds of destruction for marketplaces that won’t work.

1. Opaque markets. Transparency is arguably the biggest benefit of any marketplace. Think of homebuyers comparing prices in a neighborhood and seeing historical sales data trends on Zillow. Or consumer sites like Etsy, which compile a rich variety of homemade goods with comparison-shopping tools. Transparency gives visibility into everything from what school district a home is in to what’s being made at the kitchen tables of creative craftspeople around the world, and is one of the remarkable advances of our lifetime. You can see how part of the appeal of GoPro is that its product allows new transparency: a view into something most of us will never experience first-hand, whether it’s back-country snowboarding or hang-gliding over cliffs in Hawaii.

But the flip side of transparency is too much information, or too much unqualified information. For sites selling consumer products, this can manifest as an abundance of items without the right tools for product selection. Even the most do-it-yourself types of consumers often want some minimal level of guidance to make choices online. How will GoPro videos be fed, organized, shared and monetized?

2. Fragmentation. Marketplaces like 99designs, Elance and TaskRabbit that have emerged in recent years have addressed the needs of ultra-fragmented markets. In these marketplaces, individual contractors or freelance workers are able to cast a wide net to find the people who need their services. Both buyers and sellers get access to many more people than they would have found before. These marketplaces spare the working mom the trouble of interviewing nine chemistry tutors and help small-business owners locate just the right outsourced contractor, such as a low-priced overseas computer coder, that can make projects like web redesigns affordable.

The danger here is leakage. Once the contractor and the consumer make their initial connection on the marketplace, there may be no reason for them to continue to use it. Businesses such as Care.com, which puts parents in touch with baby sitters, for instance, may find parents will use the service for a month or two, find a nanny and then are gone forever. What will stop someone from looking once at a GoPro video and moving on to an ESPN channel, never really having any loyalty to either?

3. High cost of doing business. One reason why consumers and suppliers alike want transparency is that they believe that casting a wide net will deliver some sort of savings, whether it be a cheaper airfare, a lower mortgage rate, or simply the convenience of finding a just-right crocheted hat without having to drive all over creation to find it.

Here’s the catch: To be really successful, the marketplace has to be able to consistently reduce costs on both sides of the transaction. Otherwise it can have the exact opposite effect of an increased cost of doing business. Sometimes a digital platform that pretends to be a marketplace is really a marketing referral model, and it represents an extra middleman — not a more direct link between suppliers and customers. Remember the promise of LendingTree.com — when banks compete, you win? The business model was based on fees for lead generation. It worked well when there was a brisk mortgage market, but when the mortgage market dried up, there was no reason for banks to pay for leads and the model had to be reconsidered.

Or in GoPro’s case: Will the company allow anyone to search for videos from anywhere for a fee? Videos are currently shared on You Tube and the company is exploring distribution via video-game consoles and in-car entertainment systems. Is this a marketplace, a media company or a social-media company? The answer to that question provides the key to its future, and its valuation.

4. Need for a human touch. Technology simplifies many of life’s chores. But focus too much on simplicity and you may lose sight of the fact that consumers are living, breathing people who respond to colorful images, clever design and good old-fashioned marketing. Some of my favorite online marketplaces are ones that have a human touch. Kickstarter, for example, is not only “the world’s largest funding platform for creative projects,” it’s also a creative project in its own right, artfully curated in a way that draws in potential funders and keeps them on the site long enough to discover compelling new projects. Kitchensurfing is another site that works well because it has taken great care with visuals.

Clearly this would be one area where GoPro videos excel. There’s perhaps nothing that is more visually compelling and human than watching the feats undertaken by the bravest among us.

Asheesh Advani is the CEO of Covestor, an online marketplace for investments with offices in Boston and London.

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